If there’s one major theme playing out in biotech this year, it’s watching out for the pitfalls. And then getting hit out of left field by something new and unexpected.

For our H1 survey, I wanted to gauge the temperature of a large group of biotech executives —  largely CEOs — as they weather the storm following two years of blue skies and clear sailing. And their concerns — counted among 77 execs who took part — came through loud and clear.

Through all the boom, no one rescinded the rule of risk in drug development. And for more than a year now, the brutal realities of that risk helped ice biotech on public markets. At the same time, good data perhaps never looked better against a bleak backdrop. And rewards were clearly on the table for any company good enough, smart enough, or just plain lucky enough to win them.

More recently, we’ve been seeing a distinct upturn in M&A, long-awaited by the industry, as Big Pharma finally gets rolling. Given the realities of due diligence, which can be complex and time consuming, it’s likely the upturn has been forming for the past 6 months at least. Big Pharma may be ready to spend again, but they aren’t looking to bring in anything picked up on the fly that could contain a nasty surprise waiting to explode.

The known risks are bad enough.

That atmosphere extends to dealmaking, where the major players are picking and choosing on who they want to dance with in the clinic.

Throw in a banking crisis, with a cutting edge that could be felt throughout the industry and a new federal law that will dictate profits on certain drugs, and you get a sense that some execs would like to know when the punishment will end.

On the other hand, biotech is dominated by a group of the best-educated and increasingly deeply experienced set of executives you’ll find in any industry. These same men and women running biotechs responded almost immediately to the first global pandemic in a century, and they seem determined to overcome anything else that presents a challenge.

That’s good, because there are plenty of challenges to face as we all await the next big upswing that lies ahead — somewhere.

The Silicon Valley Bank crisis: Lessons learned as execs ponder longterm fallout

With 58% of biotech execs in our survey shrugging off the abrupt Silicon Valley Bank collapse, you may be inclined to dismiss the whole crisis. But it’s not that easy. While 42% did ring an alarm about the consequences of the financial disaster that played out, most of the comments on both arms of the chart included a nuanced take on exactly what the future would look like.

To recap: Almost out of nowhere, SVB ended a week in crisis and was shut down on the following Monday. It would be an understatement to say that a lineup of biotechs that kept their money at SVB was alarmed. Many went straight to DEFCON 1, wondering how they would make payroll. SVB had become a key player during the biotech boom, placing themselves as experts in managing tech company cash. But that didn’t eliminate the risk of a collapse when only $250,000 of their deposit was federally insured.

The US government, though, waved its magic wand and guaranteed everything, making them instantly whole again. SVB, though, was gone. And all their relationships were in play. At the same time, a leader in debt financing for biotechs was eliminated, leaving the biotech execs affected dangling.

A number of the comments that came in essentially boiled down to this:

The niche will be filled by new players in the long-term although cost of borrowing will increase in short to medium-term. — Anonymous

Jak Knowles

Indeed, while we were conducting the survey, HSBC, which had grabbed control of the UK side of SVB, had signed up much of the old SVB crew in the US, putting them back to working their connections through a much stronger financial institution. First Republic, though, quickly found itself in a world of hurt, damaging another high-profile player in the biotech world.

New players may step in, but will they be as capable?

SVB was the leader in venture debt to the biotech industry. As we move into an environment where the cost of raising capital is increasing dramatically, I am concerned that other banks may not be able to underwrite biotech venture debt due to regulation or lack of industry expertise. — Jak Knowles, CEO of Affini-T

Crises and financial cycles are nothing new to the old-timers in the business. You get a sense in the comments that the industry learns fast from the stunners — then moves on.

If SVB taught us anything, we now realize that risk lies in places we least expect, alongside stalwart institutions that were previously “automatic” decisions should no longer be. Our industry has already moved on from SVB and we are wiser for it. — Robert Ang, Vor Bio CEO

The standard practice among the companies we polled shifted to a more conservative approach to balancing funds across a couple of banks almost instantly.

One way or the other, SVB raised a red flag that no one will forget anytime in the near future. In a treacherous financing environment, a banking crisis is always a very real possibility — adding additional risk in a drug development world that is already playing against some pretty stiff odds.

Everyone is waiting for the other shoe to drop- those of us who survived this are thinking about how to protect ourselves from another event like this. We never thought this was a serious threat before. — Anonymous

Paul Hastings

Let’s leave the last word to Nkarta CEO Paul Hastings, who has a few things to say on the matter:

Of course SVB was with us in the building of this industry, providing products and services for tech and biotech alike and importantly entrepreneurs. If SVB goes away and we lose their products, yes that will be bad, Also I think the collapse was brought upon (by) some mismanagement coupled with a state of twitter panic induced by folks like Peter Thiel and Vivek R(amaswamy) and Kessler from WSJ. It’s against the law to walk into a crowded theatre and shout “fire” and we need laws that prevent that on twitter. That was BAD behavior which sparked panic and a massive disruption to all of our companies. Now we are all worried who the next panic attack will come from or the next politician espousing this was because SVB is WOKE…no offense, but what bullshit. Sorry. Enabling entrepreneurs and curing cancer and other ailments are NOT WOKE initiatives.

The Inflation Reduction Act: Quite a few biotech execs basically hate it

After years and years of talk, Congress finally got around to tackling drug prices. And quite a few biotech execs are not too happy about being on the receiving end of this one.

Right close to half of the execs concluded that the IRA would have a direct impact on their business. One in five concluded that it might. Only 31% ruled it out for their biotech.

Turn to the industry as a whole, though, and the threat assessment swells significantly.

Fully 85% of the survey group believe that the IRA will have a direct impact on the industry. A mere 4% ruled it out, with the rest in the uncertain column.

This is the nut of it:

All small molecule companies and their assets have become less attractive as a result of the IRA. The disincentive to expand the label for oncology products is especially troublesome, for patients as well as for companies. — Anonymous

Among those directly affected, one exec notes:

We are re-evaluating the value of seeking a label for second or subsequent rare disease indications for a single molecule, particularly if those indications are primarily reimbursed through Medicare. We may also bias our pipeline towards biologics. — Anonymous

The ripples spread straight across the biotech pond.

Less R&D spend by big pharma = fewer discovery deals, in general, for biotech; the “best ideas” and assets will still receive funding. But there will be less to go around. — Anonymous

John Maraganore

John Maraganore, the ex-Alnylam chief who now godfathers a bevy of startups, explains the situation:

The IRA created an ill-advised separation of government price controls for SMs and biologics, and also set new constraints on product development in orphan diseases. Industry will need to work hard to change and/or mitigate these innovation-toxic features with CMS guidelines and new legislation in the future. In the meanwhile, IRA will have a meaningful impact on discovery and development strategies and portfolio decisions across the many companies where I serve as a Director or Advisor.

And there’s more.

The choice of investment in small molecules for chronic diseases of the elderly has been inadvertently disincentivized by the legislation – an enormous downside for healthy aging. We will need to be more selective in which types of molecules we take forward and which indications we pursue. Additionally, the fast-to-market strategy for later stage or smaller indications followed later with larger indications requiring longer development timelines will be harder choices to make. This will negatively impact people who could benefit from those earlier launches. — Deborah Dunsire, CEO, Lundbeck

Chris Garabedian

Strategically, the IRA creates a whole new set of considerations that will guide investors as they decide which programs, science and people they back.

One of the major exit opportunities for all biotechs is M&A by larger cap pharma. As pharmas reassess their priorities and what they are seeking for their pipeline, it will have trickle down effects on how VCs invest and how biotech determines how to determine which programs and indications and multiple product strategies they will pursue.
— Chris Garabedian CEO, Xontogeny

In some sense, the IRA simply increases a sense of foreboding about what the future holds, a warning sign that points to worse ahead.

Every company I know is now thinking through and reacting to the IRA – as it exists today, and as they fear the anti-pharma group of legislators want to take it to in the future. — Anonymous

Barry Greene

On the bright side, some are thinking of what could be done if lawmakers did a little rethink of the legislation.

Changes could be made to the IRA that would be helpful to innovation. For example, if a company develops a medicine for an orphan disease, the timeframe for price negotiation under the IRA should only start if/when the medicine is approved for use in a disease with a larger patient population. In addition, clinical research that leverages both small and large molecules is important as they can target different conditions and disease areas, and there should be equal incentives for both platforms, rather than creating disincentives. If a clock needs to exist, it should be 13 years for both. — Barry Greene, CEO at Sage Therapeutics

How’s your runway looking? (Not good enough)

It’s generally not hard to discern a consensus on these questions, and when we asked about how much financing runway a biotech needs right now, the majority quickly weighed in at two years.

Rami Hannoush

Determining how much cash you need for two years, of course, involves weighing exactly what you’re going to do with it.

Extending the runway and prioritizing the critical path is critical for a biotech company in this macro environment.    — Rami Hannoush, CEO of EpiBiologics

Arie Belldegrun has been there and done that. As a biotech investor now following his sale of Kite, he likes his portfolio to have enough fuel on hand to stay in the air past the end of 2024.

As a VC, I would like to assure that the company does not need to be back in the market till at least early 2025.
— Arie Belldegrun

For one of Belldegrun’s close associates, though, maybe counting years ahead on the calendar shouldn’t be your only guide for every stripe of biotech out there.

Context dependent – for new companies just getting started, at least 3 years of runway which will allow clear line of sight into clinic. For everything else, funding to clinical data that is de-risking is the key. — Arjun Goyal

For a not-inconsiderable 24% of the execs, two years is not enough.  And at the same time, it may be impossible for many to get past the next 12 months without a distinct improvement in fortunes.

Ideally, from my CEO perspective 3 years or more provides a cushion to weather the dynamic nature and uncertainty involved in drug development despite the high cost of capital; however, the reality is that most will aim for 2 years; and many actually have 1 year of runway. — Anonymous

Maybe the best answer in these times of high rates and squeezed budgets: you should do as well as you can.

It will be hard for all companies to have 2 or greater years of runway but the current market has punished those who have to raise capital to maintain a 12 month runway extremely severely so I believe that managements and boards need to carefully consider extending the runway when feasible. — Deborah Dunsire

Bringing out the axe: Chopping the burn rate

It’s tough, but the answers to our question four leads straight to our answer on question five: Many biotechs are dropping development programs to extend runways.

Arjun Goyal

Four out of 10 have already dropped programs in order to carve out a longer path, a major fallout from the ongoing financial crunch. And another 5% are pondering that right now. A slight majority have managed to keep the pipeline intact.

Every responsible early stage biotech company today should reassess its portfolio and focus only on the lead and one backup program. Sign of the times! — Arie Belldegrun

Several of our companies have rationalized their pipelines to focus on financing their key programs to clinical POC. Part of the review is also a renewed focus on whether one’s program is truly differentiated or not in a rapidly evolving clinical landscape. This will yield smarter capital allocation decisions and be better for patients in long run.
— Arjun Goyal

For some, it starts early:

We have reprioritized our preclinical programs and raised the bar on new program starts. — Anonymous

For some, it’s not about dropping programs but tapping on the brakes. Others have doubled down in the hunt for non-dilutive cash, the mother’s milk of biotech in this scene.

Not dropped programs but seeking more non-dilutive funding than otherwise may have done. — Anonymous

Clifford Stocks

Of course, not everyone is cutting back. For companies that have good data, winning catalysts and either revenue or near-term revenue, the money is good. This comment went unsigned, but….

With the potential approval of zuranolone later this year and our strong product engine, we are in growth mode.
— Anonymous

Three-year budget includes trimming research programs and a slow down of enrollment toward an accelerated approval and focus on patient enrichment that could provide proof of concept clinical data that would be attractive to Pharma and/or institutional investors. This is not a bad thing, but rather it is capital efficiency which is the heart of the entrepreneurial spirit. — Clifford Stocks, CEO, OncoResponse

Inflation is hitting home: In several ways

A clear majority — 58% — see this one as a no-brainer.

Robert Ang

Of course, inflation has an impact on them, they would tell you, as it does every other company out there that has to deal with a workforce that is often struggling to make ends meet in a very difficult time for the economy. Interest rates go up, making the cost of capital more expensive, when there’s an increased demand for capital as the public markets stay bitterly cold for most.

About the only bright side here is that you can get a better return on the money you have in the bank. But few of the 38% who rejected the notion that inflation was having an impact explained their thoughts in the comments section, which was dominated by remarks concerning its sting.

One of our execs summed it up: “Increased costs. Employee unrest. Investor sentiments. Development limits.”

As Robert Ang, CEO of Vor Bio, reports, interest rates have “affected the entire economy, caused generalist investors to flee equities (particularly risky equities in tech/biotech), and has been a key driver toward depressed prices. While necessary to control inflation, EVERYONE is affected.”

Cost of capital is higher for all investors and LPs. If you can get a high rate of return parking your cash in the bank, it reduces the attractiveness of biotech as an asset class because of binary risk. — Jak Knowles

Inflation and rising interest rates have increased the cost of capital for our company and industry. As such, DCF (discounted cash flow) valuations have come down. — Anonymous

That doesn’t mean the impact is not manageable.

We have Venture Debt with floating rates so those interest payments are greater than when we took the debt. Regardless, it is an attractive (and less expensive than equity) source of capital. — Clifford Stocks, CEO, OncoResponse

One anonymous remark highlights how inflation influences biotech execs’ view of risk.

Innovation investment is always driven by the simple equation of ‘$ Value Produced / $ Cost to Generate Value’. Multiple forces are combining right now to decrease the quotient. The IRA and other legislative actions are decreasing the $ value of innovation, while increasing interest rates are affecting cost of capital, which over the years long cycle of discovery / development / regulatory, creates a significant hurdle. Investment therefore needs to be on lower risk (=lower innovation) projects. — Anonymous

Taking the industry’s pulse on the working relationship with the FDA

Over the past 5 years, the industry and the FDA have enjoyed a close relationship, marked by accelerated approvals (particularly in oncology) and new policies that opened doors at the agency for many. That hasn’t been controversial, of course, as lawmakers from both parties found plenty of bipartisan support for going after drug prices, especially as a growing number of those approvals opened up markets for drugs that either proved ineffective, dangerous or wildly expensive.

The inevitable reaction inside the agency, closing some of those doors or at least limiting access, has sparked a bit more grousing in my private channel in recent months than I had been used to.

The pulse of the industry, though, indicates that the disenchantment I’ve detected may not be that deep. Fully 44% of the E100 expect the relationship between the industry and the FDA will remain unchanged in the next 3 to 5 years. An equal percentage think it will get even better.

Deborah Dunsire

Nothing inspires frustration in biotech circles more than changing directives from the agency, but Deborah Dunsire gives the agency kudos for doing better on that score. Her remark:

FDA is making their approach to regulation clearer and the clarity benefits our ability to plan. Importantly, They indicate a willingness to continue to support accelerated approvals when warranted. It is critical that we in the innovative industry uphold our obligation to complete confirmatory trials in a timely manner.

This next comment from David Berry, CEO of Valo Health, helps summarize the consensus.

The FDA and biopharma have been and continue to be committed to developing drugs on behalf of patients. That has not changed and is unlikely to change in the future.

Only about 1 in 10 of the E100 believe the relationship will get worse.

Arie Belldegrun

That doesn’t mean there aren’t broad concerns, some of which are breeding a loud thread of anonymous criticism. And part of it is directed at the way the FDA hunkered down and devoted resources to Covid while starving other segments of the agency that weren’t on pandemic alert.

COVID created the unfortunate need to shift priorities and reallocate personnel. It is the hope that these issues will be corrected in the next 1-2 years. — Arie Belldegrun

And the harshest critics may be anonymous, but they are definitely not happy with what they’ve been seeing.

It has been worsening and will continue to do so in the near term and then will improve. This cycle has occurred over the past decades and is frustrating. I don’t know about the future, but the recent present appears to have been a period of decreasing reliability and trust between biotech and FDA. As always, anything that can increase the pace of science-driven discourse about drug development programs would go a long way towards increasing efficiency, reducing risk and improving the quality and price of approved therapeutics. — Anonymous

I’ll add here that when I pose this question in private conversation, I also tend to hear back that the FDA is not a monosyllabic organization. Each disease or tech category is represented by individuals who often share conflicting approaches. What may be viewed positively in oncology — where Richard Pazdur still rules the roost — may turn bleak around some other internal group.

But overall, the industry seems fairly content if not approving of what’s to come.

I believe that a mutual commitment to patients and focus on great science will continue to strengthen FDA-industry interactions. There may be occasional challenges and/or obstacles (FDA resourcing, political factors, debates on standards for evidence generation, others), but SCIENCE and PATIENTS will win! — John Maraganore

Despite the headlines, the E100 is (mostly) still in hiring mode

Here’s where we get into a set of questions we’ve been asking since shortly after launching Endpoints News in 2016. Tracking industry sentiment on hiring and key financial trends is an essential task of the E100, and I was more than a bit surprised to see such a bullish response on hiring by a solid majority of our respondents.

I will note here that in preparing the H1 survey, I culled a rather large group of execs who had either moved on to new things, shut down their companies, or simply dropped off the radar without explanation. Some of that may have reflected busy schedules, and some may simply not want to answer questions like these right now, anonymously or otherwise.

Whatever the reason, in adding new CEOs to the list, you inevitably sometimes turn to startups that often got their A rounds after the downturn began, leaving them in a honeymoon stage of early growth while birthed to deal with longer runways and tougher IPO markets.

Also, if you want to talk to someone who’s brimming with enthusiasm, call a newly created CEO who’s just come out of stealth with fresh money and a game plan for preclinical ideas.

Here’s one remark that puts these survey numbers in context:

Pity the fool that attributes their name to reducing staff. — Anonymous

It’s not hard to introduce bias into a running survey, and I have to consider that.

John Quisel

Still, with 71% saying they’ll be hiring and only 5% saying they are cutting back — in a year marked by daily bursts of headlines centering on layoffs and restructurings — you can’t ignore the cheering section. Many biotech execs are bringing in new staff, and that can be easy to overlook in a down-round environment.

Our company is doing well and we are going to be in the clinic with two INDs at the end of the year. We have to staff up to get ready for running two clinical programs next year. — Anonymous

We are in the fortunate position of being well-funded with a host of clinical trials in process. As a result, finding top talent to build our team remains a priority. — John Quisel, CEO, Disc Medicine.

Pierluigi Paracchi

Besides, with good people getting the pink slip, can you ignore the talent pool out there?

We have clinical data from the first indication of our platform that push us to consider to start a second indication also hiring new staff. And, never seen so many talent available out there.
— Pierluigi Paracchi, CEO of Genenta

You also have to balance the remarks from the private side and the public biotech companies, which have been surviving a tempest. Here’s one public biotech CEO who’s careful about recruiting.

VERY carefully under our austerity plan those that are necessary. — Paul Hastings, Nkarta

IPOs are still out: For now

The headline here is that the black mood on biotech IPOs hasn’t grayed much at all.

The overwhelming 92% majority that marked up the IPO market as poor in our last survey has slid by only 3 points in our latest poll. It is night and day from our 2021 numbers when biotech IPOs of every stripe were almost automatic winners on Wall Street.

But universal success during a boom — and the enthusiasm that can spark — tends to be a prognosticator for the bust that follows. Nothing goes up forever on Wall Street.

The bullishness on capital access is gone, but confidence is not

Of course, IPOs are just one of a variety of ways drug developers can raise money these days. And there’s a considerable level of basic confidence in their ability to keep funds flowing in.

Close to half of our respondents are in the confident/very confident categories, with an enthusiastic but tiny 4% counting themselves as very confident. There are 37% that are fairly confident, and one in 10 that are feeling a complete lack of confidence.

Even if you are able to raise capital, though, there are new considerations to consider.

For us it’s a price issue. If we need to access capital it will just be more “expensive.” — Anonymous

There are also trends within this big trend to consider:

We have strong clinical data. However, we are an IO company working on myeloid checkpoints. This category does not seem to be in favor with investors, unless you have very strong Phase-2 data. — Anonymous

And that’s something you hear a lot about these days. Strong human data is the gold standard in capital markets. Actual revenue from established products becomes the bottom line factor for many investors.

There is still lots of money in the system looking for a good investment. There is however also a consistent ask for discounts, and new biotechs are now competing with public biotechs with the same valuations. It’s not impossible to raise money with a new technology these days but it is hard. But it is always hard! — Anonymous

While we were one of the fortunate few to raise money in late 2022 (our first public follow-on), this was not an easy process. We were fortunate to have the necessary elements – (1) novel clinical data that spoke towards proof-of-concept, (2) a reasonable valuation that allowed tolerance to dilution, and most importantly (3) a diverse and supportive existing investor base. Without any of these elements it would have been impossible. — Robert Ang, Vor

Companies that have strong science, product-focused teams and are focused on important unmet clinical needs will thrive – as they always have. — Arjun Goyal

Here’s a comment that also captures the zeitgeist in biotech today. What goes down eventually goes back up. The question is when.

I’m hoping the cycle turns over, and I’m an optimist, and the cycle could turn at any moment..I’ve seen 35 years of cycles so I’m optmistic that it will turn, but the signs are there for a rough year in 23 ( could change tomorrow). — Paul Hastings

How low can you go? And are we there yet?

If there’s one word that captures biotech’s perceived valuation today, it’s “low.”

Sixty-eight percent of the E100 responders are in the low to very-low camps. But there are exceptions to the rule.

Valuations are depressed across the biotech market, especially for early-stage companies, with record numbers trading below their cash value. There is certainly more value than investors are giving credit for – we seem to be in a period of overcorrection from the high points in late 2020. — Anonymous

Getting back to normal may involve finding a happy medium between the highs of the boom and the bottom-scraping valuations many are seeing these days.

This needs context: biotech valuations were clearly inflated in 2021, but many companies have been oversold. An appropriate valuation for many companies probably lies some way between 2021 highs and 2022 lows – in many cases probably closer to current valuations. — Anonymous

On the other hand, as the pessimists say, it may be that it’s always darkest before things really turn black.

Valuations are market driven so they are what they are. Biotech raised too much capital in 2020 and 2021 and, but for the vaccine arena, has shown little in the way of impact to date. Beware of saying, “it cannot get any worse” because we are likely to see valuations slaughtered even further as those who raised tremendous amounts of capital run out of money and have little to show. — Anonymous

We started this climate survey as M&A was just picking up, though, which seems to be encouraging some brighter outlooks recently that the survey may have partly missed.

Build good data and they will come

One consistent theme that runs through almost all my conversations with biotech execs and professional investors over the past two years is that any review of Big Pharmas’ pipelines would tell you that there is a crying need for more drugs from biotech. And that means M&A had to spike.

So it was no great surprise to see that theme play out in the comments section to our question on M&A.

Though many large pharma companies are holding off investments for now, the patent cliff is looming and valuations are favorable to deploying strategic capital. The question is when the smaller biotechs will agree to take investment at lower valuations. — Anonymous

The capital environment shows no sign of returning to the valuations of 2020-2021. As runway continues to be more difficult / expensive to obtain, boards will become more flexible on M&A pricing. this will lead to value buying from those able to buy (pharma). — Anonymous

One lesson for many is that low valuations aren’t what triggers a Big Pharma buyout. They’re looking for derisking and good shots on goal. And they can pay for that.

There will be significant M&A activity among cash strapped smid cap biotechs. But M&A driven by big Pharma will remain about the same and will be driven by positive clinical readouts rather than lower market valuations. —Anonymous

Companies have fewer alternatives due to less robust capital markets (duh), so Pharma are taking their time, building relationships, waiting for strong data, and are willing to pay more for good assets. I believe Pharma acquisitions will remain tepid, except around companies with strong clinical data in arenas with great unmet need. In those cases many more auctions and higher clearing valuations should be expected. On the other hand, many biotech public::public, public::private and private::private mergers will occur as companies run low on cash, CEOs and syndicates become reasonable and the banking industry uncovers and drives more of these transactions. — Clifford Stocks, CEO, OncoResponse

Thanks again to all the CEOs who were up for this survey. We’ll be back in H2 to take the industry’s temperature again, when hopes will either spring anew or nerves will become increasingly frayed.

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